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Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Effective Grants Management

In order to provide effective grants management, we need to make sure that we are performing bookkeeping at the grant level.  Our grant accounting needs to properly allocate costs to the grants while maximizing our grant reimbursement and avoiding any cost disallowance.

Our board members and related governance should be knowledgeable and informed about grant budgets and compliance requirements.  The board should stay knowledgeable of grant administration trends, developments, and regulations.  The board should understand what the organization is committed to and are Its programs delivering what is required.

The program staff needs to be involved in the data collection and reporting responsibilities including the proper reporting to the correct grant budget categories.  We need to establish and schedule future grant deadlines to insure timely grant report submission.  We would suggest sharing the grant agreement with the program staff to insure all grant requirements and deadlines are met.

Federal grants are governed by the super circular which is also referred to as the uniform grant guidance.   Auditors audit based on these requirements with the assumption that the nonprofit is knowledgeable and informed about this grant guidance.  Federal grants and awards are specifically identified and require a financial management system that identifies the source and application of federal funded activities.  Federal grants typically require written procedures around payment requirements, allowability of costs, procurement procedures, and standards of conduct.  For example, procurement procedures need to be written with good procurement records and follow the guidelines.

The grant audit requirements include the ability for management to prepare the Schedule of Federal Awards (SEFA) and it should be reconciled to the accounting records.  If the SEFA is a required part of the audited financial statements, the auditor will issue an opinion if the SEFA is fairly stated as a part of the audited financial statements.

Cost allocations are an integral part of effective grants management.  Effective cost allocations will allow to report and recover the fully loaded program costs to facilities and administrative costs.  Some organizations could benefit from documenting their cost allocation and federal programs may require a formal cost allocation plan.  Some acceptable methods of cost allocation would include hours worked for variable costs, and square footage for fixed costs like facilities.

Grant advance would be for grants that provide advanced funding.  It is important that you don’t spend these restricted funds on other activities and you can keep track of restricted expenditures and restricted grant cash balance.  You may want to track these advances by grant and as deferred revenue to show how much of the cash or accounts receivable balance is restricted.

Cost reimbursement for grants require you to submit reimbursement request timely to minimize cash flow delays.   Your grantors typically believe you have already paid these costs when you submit your reimbursement request.  You may want to obtain a line of credit for reimbursement delays and disclose the possible longer payment terms with your contractors and vendors.

The grant reporting needs include grant budgets which match grant budget line items with financial reporting.  Grant reporting should be able to report total grant spending including direct and indirect cost allocation.   Proper grant reporting requires a grant reconciliation to insure internal and external reports agree and that you are maximizing the reimbursement along with minimizing over and under grant spending.

Grant close out requires you met the compliance requirements and make any final grant budget revisions.  You will want to make sure you make any budget revisions in a timely manner to make sure you have time for any grant budget revision approval that is required.

Your accounting system should be able to meet your grantor reporting needs including their budget line items.   This typically requires segment tracking to track your grant as a separate fund including tracking by program.

Some examples of lack of effective grants management would include grant findings, monitoring visits, spending issues, and lack of a grant budget and related projections.

It is important that you continue to strive for effective grants management within your organization.  Our firm is here to help your organization perform more effective grants management so please let us know if we can be of assistance.

Developing Effective Dashboards and Key Performance Indicators June Nonprofit Forum

We hope you’ll join us for what has become one of the hottest nonprofit accounting topics: Dashboards and KPIs.

It’s more than measuring – though that is necessary.  It’s more than powerful displays – though they are so cool to work with.  It’s about choosing the right things to measure and monitor with your mission in mind.

Join us online for the Nonprofit Forum June 27, 2018

11:30 to 12:30-Financial Management Topic
Developing Effective Dashboards and Key Performance Indicators

Simply click on the link to register for Developing Effective Dashboards and Key Performance Indicators.

Do you have a dashboard and know what your key performance indicators (KPI’s) are for your organization? Please bring your questions so we can have a candid conversation regarding dashboards and KPI’s.

We’re happy to share what we’ve seen in the field, but it will be a more valuable use of your time to talk about what matters for your organization.

Nonprofits are complex organizations that are built around mission and outcomes, which must be supported by the right revenue and expense models. We will cover the critical aspects of Effective Dashboards and Key Performance Indicators including:

  • How dashboards allow decision-makers to see where and whether the organization is on the planned financial path
  • Using dashboard with funders and stakeholders to illustration real-time progress towards desired goals.
  • How to develop the associated metrics and constantly review to ensure you are measuring success for the organization.

A properly designed dashboard allows a nonprofit to monitor its effectiveness as evidenced by the financial health along with the impact of the programs and services provided. Board and staff should develop strategy and goals to create dashboards with focused conversation and collaboration.

When you select the dashboard elements, you should understand the data you will track and how that data will influence decision making. Questions to ask include: Are the metrics for the organization or function? Is the tool for the board, staff, or funders?

Please join us – the Nonprofit Forum is free to nonprofit organizations, but registration is required. Simply click on the link to register for Developing Effective Dashboards and Key Performance Indicators.

For a listing of future Nonprofit Forum dates and topics, please visit our Events page.

Building a Superior Budget - May Nonprofit Forum

Building a Superior Budget – May Nonprofit Forum

Nonprofit Forum Agenda for May 30, 2018

11:30 to 12:30-Financial Management Topic
Building a Superior Budget
Please join us online, Wednesday, May 30; simply register using the link below.

Click here to register for Building a Superior Budget – May Nonprofit Forum

This session is free to nonprofit organizations.

The May Nonprofit Forum continues with Building a Superior Budget.

Those attending the May Nonprofit Forum – Building a Superior Budget will learn:

  • How to transform a strong budget into a superior budget
  • What most nonprofit leaders focus on and what they should focus on
  • How to use a rolling forecast to better anticipate results
  • Where cash flow projections could impact adjustments
  • And more

Click here to register for Building a Superior Budget – May Nonprofit Forum

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance department’s capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Click here to register for Building a Superior Budget – May Nonprofit Forum

Those attending the forum will receive handouts.

12:30 to 12:50-MIP User Group-Budget Refresher

12:50 to 1:00-FTM Updates and Closing

Click here to see a listing of future Nonprofit Forum topics.

Why your Nonprofit should consider using Nonprofit Accounting Software?

Why your Nonprofit should consider using Nonprofit Accounting Software?

By Jim Simpson, CPA and director, Financial Technologies & Management

Your organization like every other nonprofit is feeling the pressure to deliver more transparency. The demand for more timely information is coming from a multitude of interested parties: board members, major donors, potential funders, and watch dog organizations.

The goal of transparency can’t be easily accomplished without sound nonprofit accounting software-financial reporting is the foundation upon which transparency is achieved.

As the number of nonprofits have proliferated, accounting software is more tailored and can help manage these complexities. But taking the time to select the right software for your nonprofit is critical.

Before your purchase, start with a software evaluation and assessment to see if you’re a good candidate for nonprofit accounting software. The software evaluation and assessment will review your current system to determine its level or utilization and functionality. It is probably a good idea to perform a software evaluation any time there is a major change within the organization either positive or negative.

Here are seven reasons Nonprofit’s should consider Nonprofit Accounting Software.

  1. Flexible report writer
  2. Grants Management capability
  3. Cost-allocation functionality
  4. Strong audit trails
  5. Integration with payroll, fundraising, and other applications
  6. Expanded capabilities as organization grows
  7. Various financial segment or element tracking to include funding sources, programs, projects, locations, and other essential financial information.

Here are features and functionality of the software that can provide optimum efficiency.

The flexible report writer allows you to use the accounting software to meet the internal and external complex reporting requirements. Generating reports should be able to be varied to meet the board, program, and funder reporting requirements and easily modified to meet the changing program and funder needs. Accounting Solutions for your Nonprofit

The grants management capability allows you to track the financial results for each grant, and report back to the funder in the required format, using one accounting system.

Cost-allocation functionality allows you to easily allocate transactions on a real-time basis to multiple programs and funding sources all within the system. It should allow to you to pool various cost pools like facilities and overhead and allocate these to the various program and funding sources to provide a full-cost accounting.

Strong audit trails keep track of what users are doing within the accounting system. The system should allow you to provide your annual auditors and program monitors with the financial information they need to meet their requirements and reduce the chances of fraud. Those involved in the finance function should have segregated permissions in the accounting system to protect the organization and its staff.

As organizations look to be more efficient, it is important they look at software that allows them to integrate their critical functions like payroll, fundraising, human resources, and other areas. Nonprofit accounting software typically has this functionality built into its various modules or it allows for third party product integration. It is typically modular based, which allows your organization to add functions and capabilities as the organization grows and needs additional tools.

One of the most important reasons to look into nonprofit accounting software is the ability track financial information different ways.

For example, an organization may want to track its various funding sources to see what funds are available. It may want to track my various programs and projects to see what the programs costs are and how the organization is doing financially. It might have various locations and want to know how each location is doing. It might have donor and endowments restricted assets and wants to do a separate accounting for these donations to know what assets are left and make sure donor restrictions are met.

It is important, too, that staff remains efficient and effective, enabling them to focus on the long-term planning of the organization and not just keeping up with the day-to-day-accounting.

There are several purchase options that include direct purchase or subscription pricing to pay-as-you-go.

You will need to insure that you include software advisory services to include planning, implementing, and training. In some cases, you will need to also include data conversion and integration services.

Boards can provide effective financial governance for your nonprofit

Boards can provide effective financial governance for your nonprofit

By Jim Simpson, CPA and director, Financial Technologies & Management

In the nonprofit community, board members don’t always provide effective financial governance. One key difference in the nonprofit sector is that the board focuses on the nonprofit’s mission and not the finances or profits. But all are necessary.

Nonprofits would have more public trust if all board members performed their financial governance at a high level and challenged one another and executive management for excellent financial performance.

There may, however, be some roadblocks. As a board member, are you unsure or scared of your financial governance role with the nonprofits you serve?

If the desire is to have a more effective board, there are some essential financial governance responsibilities that a board should be performing for a nonprofit.

Here are eight effective financial governance responsibilities to look for in your nonprofit.

  1. Financial tracking by funds and program. It is not good enough just to know if your organization has a surplus or a deficit for the organization. You should know if your individual funds and programs are generating a surplus or deficit. It is impossible to be a financial steward if you don’t know which funds or programs are overspent or underspent.
  2. Financial reports need to be produced monthly. It is imperative that board members receive financial reports at least monthly. A board member can only perform his or her financial governance role if he or she can help the organization to anticipate and plan for changes based on financial results. It is important that these financial reports are timely and accurate to avoid making the wrong financial decisions. The financial reports should be goal oriented to allow the financial governance to focus on its accomplishments. Best practices financial reporting would include both budget and historical variance financial analysis. A goal oriented report would focus on the budget priorities and key financial areas of the nonprofit.
  3. Financial health is priority. Poor financial health usually results when no one knows the financial condition and when one person controls all financial information. Significant comments from the annual audit and staff turnover are also indicators of poor financial health. It is important that the board pays attention when these conditions exist and work towards increasing financial expertise and capacity. Financially healthy organizations hold themselves accountable, understand roles, and maintain compliance with adequate and qualified staff. Effective board and management practices are essential for segregation of duties and internal controls. These board financial practices should promote communication, expectations, and operating efficiencies so the organization can be monitored efficiently and effectively.
  4. Proper accounting software. Many nonprofits use manual or commercial applications to perform nonprofit accounting. It is important that you provide the finance staff with the right tools and accounting software to do the job properly.  It is important that board members ask questions regarding how the organization tracks financial information. One financial question to ask might be: Does the organization track financial information by funding source, by program and by accounts?  An annual review of accounting software and tools can uncover what additional software modules are needed including whether you have outgrown your current software.  It is important that organizations review software that is designed for nonprofit organizations. Nonprofit accounting software typically allows integration of third party systems like fundraising and payroll to increase efficiencies of various systems.
  5. Financial stewardship. All board members need to act as financial stewards not just the treasurer for the nonprofit’s that they govern. Unfortunately, board members don’t take this role seriously enough and thus organization’s fail financially which significantly reduces public trust.  Board members must understand financial stewardship and make it a priority for the organization that they govern. Board financial practices should include financial policies and procedures that promote stewardship and accountability.
  6. Budget management. Board members need to work to enable management to know when to modify programs and operations. It is important the budgets be realistic and revenue based to anticipate any shortfalls. Budget management should include budget projections and cash flow management to insure stable nonprofit operations and programming.
  7. Financial reserves. Board member financial stewardship roles should include establishing financial reserves for the organization. Financial supporters would rather support well established and financial stable organizations. It is important board and management are committed to generating an operating surplus and positive cash balances. It takes a lot of financial discipline to establish financial reserves.  A nonprofit is typically financially stable once it can generate financial reserves of several months of operating reserves. The financial reserves are essential to shield the organization from reductions or delays in funding
  8. Financial plans. Board members need to have financial plans for the organization. Just as an individual has a financial plan that changes as the individuals needs changes, the nonprofit needs financial plans that are reviewed and modified as needed. Financial goals and strategies should change and anticipate the future.

As a board member, I challenge you to review these financial governance areas of your organization to see how you are performing your financial governance role. It is important that you help the organization perform its financial role and not just rely on the treasurer or executive director to perform this role. It is important that you don’t just assume financial governance is occurring, but verify that it is actually taking place.

Board members need to be equipped board members with the tools and abilities to perform the financial governance roles. Board members need to verify that management and staff has the proper capacity and expertise to perform the finance function for the organization. If the organization does not have the proper internal resources, then they may need to look for outside expertise.

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

By Jim Simpson, CPA and director, Financial Technologies & Management

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts. The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization. Finance and accounting departments are two essential back-office areas in nonprofit organizations.

With limited resources, a nonprofit can outsource some or all its financial functions, which can help a nonprofit efficiently staff and conduct its financial operations. It also respects the board and executives limited time or expertise to manage the finance functions, and allow more allocation of resources toward mission and program outcomes.

Here are six overlooked, and sometimes unknown, benefits of outsourcing nonprofit accounting.

  1. Improved efficiencies. The less time internal staff members spend on duties that can be outsourced, the more time they can focus on mission and program outcomes. Typically, outsourcing also results in more timely and accurate financial information, which leads to a better operating organization. One way to assess this is to review how much time is currently spent weekly on accounting and finance to determine where this time could be better utilized with a better functioning finance department.
  2. Reduce costs. The organization can save money by outsourcing the finance functions that are not core to its mission. It is not uncommon for an organization to save 20 to 40 percent in total personnel costs and control these costs. By purchasing services and expertise for time needed by your organization, you can better afford the multiple staff levels an organization needs that includes bookkeeping, accounting, controller, and CFO service levels.  An additional cost saving is that services can be provided off-site, which can save facility costs and overhead-related expenses. Outsourcing can be used for major finance projects including the annual audit, budget preparation, software implementation, and other projects that drain internal staff’s time and energy. There are many intangible benefits to include timely and accurate financial reports, eliminated frustrations related to staff management and turnover, and saving management’s valuable time. If your accounting staff leaves for another job, the knowledge and expertise leaves the organization, as well, and is typically costly and difficult to replace.
  3. Reduce fraud threat. Segregating accounting duties between internal and external staff inherently reduces fraud risks. Outsourced accounting provides the organization with checks and balances along the proper oversight to prevent fraud. Many nonprofits rely exclusively on external auditors to detect fraud but these are not intended to detect fraud and only detect fraud it 3 percent of the time. The increased segregation of duties strengthens your internal controls and procedures, while providing increased transparency and accountability in the overall financial operations.
  4. Higher level of expertise. Many nonprofits can’t afford to employ a staff member who has controller and CFO skill sets and can perform the day-to-day bookkeeping and accounting needs for an organization. By outsourcing, you can take advantage of an expert team’s significant financial expertise, while staying current on the latest regulations and laws. Best practices and improved efficiency can result from the implementation and improve your accounting and reporting functions. The higher-level expertise provides a strategic and fresh perspective to identify deficiencies and add capacity to enable bookkeeping and accounting staff to complete day-to-day activities.
  5. Ability to scale. A nonprofit organization needs the flexibility to increase or decrease the size of its finance department, a difficult task when you have allocated internal staff to the finance function. With outsourcing, you can scale your service level up or down to meet your current situation and needs. You can outsource certain finance functions or the entire accounting function. Outsourcing can be performed on-site or off-site, which also provides flexibility to the organization.
  6. Accounting software expertise. It is unlikely that the internal staff will be able to stay current and fully utilize the updated accounting software. Normally, an organization is faced with staff turnover and no training budget. It is likely that the internal staff has never experienced a new software implementation and is relying on how previous internal staff utilized the accounting software. Furthermore, internal processes and systems don’t change to accommodate new software features and enhancements so software utilization doesn’t improve.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.

Having the right team in place allow you to focus more resources on your mission and related program outcomes while having a better functioning finance function. It is important that you have the right expertise with an outsourcing firm that you trust and enjoy working together so that a long-term relationship can develop. Keep in mind the organization will still be making the financial decisions, but should be able to make better decisions with the financial advisor performing the role and making recommendations to assist with the organization’s decision-making. Look for a firm that will tailor to clients’ needs and become an extension of the organization’s team regardless of the service levels.

Common audit pitfalls and misperceptions

By Jim Simpson, CPA and director, Financial Technologies & Management

While not required by Indiana law, one reason a nonprofit might conduct an audit is to demonstrate the organization’s commitment to financial transparency and accountability.

And while a nonprofit can spend considerable resources for its annual audit, it is important that it consider the following to ensure the audit is a success.

No delays: An audit needs to avoid any major delays. It is important that an auditor schedule significant time to complete most of the audit during fieldwork. The nonprofit needs to prepare for the auditor and have all the major items ready prior to the start of the audit. An auditor and the nonprofit should work together to complete any open-audit items prior to the audit.

Minimal accrual and year-end adjustments: The nonprofit needs to ensure that all accrual and year-end adjustments are completed prior to the start of the audit and to verify that last year’s audit adjustments have been recorded and reconciled with the prior audit. It is also important to understand and record any adjustment so that auditor is not performing the nonprofit’s responsibilities.

Minor board and management comments: It is a good idea to have an exit interview after the fieldwork to review the audit’s results and any remaining open issues that need to resolution to complete the audit. An auditor should provide written and verbal feedback of results.

Here are items that might be addressed in a written communication:

 significant new accounting policies

 significant or unusual transactions

 significant accounting estimates

 audit adjustments

 management disagreements

 significant issues or difficulties

No material weakness or significant deficiency: This is a deficiency in internal controls that could negatively impact financial integrity. A significant deficiency is also a falling of internal controls that is less severe than a material weakness, yet important to mention to those charged with the organization’s governance. An example would be investment reconciliation that was not performed on a consistent basis and led to investments not being properly reported.

Nonprofit should prepare audited financial statements and related disclosures: The organization should have the ability and accounting systems to prepare the audited financial statements and related footnotes and disclosures. The auditor’s focus should be to test financial statements prepared by management and provide an independent, expert opinion that the nonprofit’s financial statements are properly presented.

Fraud detection is not purpose of audit: While nonprofit leaders may believe the annual audit will uncover fraud, it is very unlikely this will occur. It may be surprising, but the external audit is only likely to detect fraud about three percent of the time. The top fraud detection methods are the responsibility of the nonprofit and not the auditor. It is important that the organization be diligent, and not over rely on the audit to deter and detect fraud.

Auditor does not guarantee financial statement accuracy: While auditor does issue an opinion on the nonprofit’s financial statements, the auditor does not certify or guarantee its accuracy. The auditor just represents that the financial statements fairly present the financial statements of the nonprofit.

If your nonprofit has one of these audit pitfalls or misperceptions, you should take action to bring expertise and capacity to your organization to remedy it. Eliminating these pitfalls and concerns later can require significant resources and can have an adverse impact on the reputation of your organization. It is much better to focus on putting corrective and proactive measures in place, rather than the time-consuming process of responding to an auditor’s findings. Accounting Solutions for your Nonprofit

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.

Developing an effective dashboard and key performance indicators

By Jim Simpson, CPA and director, Financial Technologies & Management

Nonprofits are complex organizations that are built around mission and outcomes, which must be supported by the right revenue and expense models.

Dashboards are one way to simply communicate and give an overview of the organization by using a graphical summary of important information. It is an easy way for decision-makers to see where and whether the organization is on the planned financial path, and additionally can be used with funders and stakeholders to transparently show progress towards desired goals.

But a dashboard without metrics is useless to the organization, it is important to develop the associated metrics and constantly review to ensure you are actually measuring success for the organization.

Effective dashboards

Charts and graphs are not considered a dashboard unless that have the following characteristics:

 Align success definitions across organization

 Encourage communication regarding progress towards goals

 Identify successes and challenges

 Actual data and evidence to make decisions

 Strengthen relationships between different activities

A properly designed dashboard allows a nonprofit to monitor its effectiveness as evidenced by the financial health along with the impact of the programs and services provided. Board and staff should develop strategy and goals to create dashboards with focused conversation and collaboration.

When you select the dashboard elements, you should understand the data you will track and how that data will influence decision making. Questions to ask include: Are the metrics for the organization or particular function? Is the tool for the board, staff, or funders?

Successful dashboards achieve the following:

 Successfully communicate strategic-level results

 Present data in a user-friendly visual format

 Create snapshot of current status and trends over time

 Show performance against defined targets

 Highlight out-of-the-ordinary results

 Create a manageable set of key performance indicators

Consider each revenue and expense stream and the factors that influence the reliability and predictability and what contributes to the increasing or decreasing of these streams.

Performance indicators (KPIs)

it is important to determine the program-delivery mechanism that influences results. Different types of nonprofits have different organizational models with different drivers for success. It is important to select Key Performance Indicators (KPI’s) that focus the organization on data that will support decision-making. Consider whether you need a dashboard that reflects trends over time or performance against goals.

In order to get started, focus on the most important part of the process, which is to define the key drivers and metrics while focusing on the most pressing issues to start. This will help you start the process of developing your organization’s key performance indicators and the related dashboards to move your organization towards data driven decision-making.

When creating a dashboard and KPI’s, you should do the following:

 Start with the big picture

 Identify the audience and how to engage it

 Define business model drivers and key levers inherent in program delivery

 Choose KPIs in a thoughtful, team-based process that is inclusive

 Re-evaluating KPIs is an ongoing process

 Establish a culture of data driven decision making

Successful Key Performance Indicators (KPIs) achieve the following:

 Represent business model drivers

 Reflect progress towards intended outcomes

 Guides priorities and decisions

 Limited number of KPIs that can be realistically monitored

 Should be periodically reassessed

When putting the dashboard reporting into action make sure you consider the following:

 Where does data come from?

 Who is responsible to collect data?

 How will dashboard be updated and how often?

 What platform or tools should we use to update dashboard?

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.

Building a Superior Budget

By Jim Simpson, CPA and director, Financial Technologies & Management

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance departments capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Typically, the budgeting process should begin three months before the end of the fiscal year to ensure the budget is approved before the start of the fiscal year. It is important that each of the following budget process practices is used to develop the budget.

 Under current financial status, including review income and expenses, compared to existing budget, forecast remainder of year, then analyze to understand variances.

 Establish a timeline that allows each step to have time for review, discussion and revisions.

 Set up goals to determine organizational and program goals and desired financial outcomes.

 Agree on budget approach to include budget team’s roles and responsibilities along with authority.

 Draft expense budget to attain strategic, organizational and program goals. It is important to break expenses into variable expenses, fixed expenses, incremental expenses and indirect expenses.

 Develop draft income budget to identify expected income from funding sources, including any new activities.

 Review draft budget to ensure it meets organizational and program goals. Distribute draft budget to the budget team to develop consensus and collect recommendations. Modify budget with budget team input to ensure everyone understands and approves the revised draft budget.

 After presentation of the budget to the board, committee and internal stakeholders, approve proposed budget. The proposed budget may need to be revised, so include this possibility in your timeline.

 Implement budget to communicate budget, assign management responsibilities, implement in accounting system, monitor and respond to changes to the budget. It is important that you document budget decisions including writing down all budget assumptions.

A budget should be implemented with monthly distributions to anticipate the changes to monthly income and expenses.

Take a strategic approach to your budget, which might include a multi-year approach to create a better budget. A budget is a living document and narrative that tells the nonprofit’s story using numbers.

Sometimes a zero-based budget approach can help you to understand a budget from the ground up and provide a fresh perspective and generate new possibilities.

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.